March 3, 2010 Americas: Managed Care
March 3, 2010
Americas: Managed Care
A front-line perspective on 2010 commercial price & product trends
Transcript from our sixth annual call with Steve Lewis
We hosted our seventh-annual industry expert conference call with Steve
Lewis, regional leader for the employee benefits practice of Willis, the third
largest insurance broker in the world. The call provided a front-line
perspective on 2010 industry pricing and product trends, with a focus on
the key middle-market segment of the industry.
A transcript of the conference call is provided in the body of this report.
Industry price discipline has strengthened further
Two years ago, Lewis and his team were one of the few industry sources
pointing (correctly) to aggressive pricing by the carriers in a lead up to
severe margin deterioration experienced in 1H2008. Then, a year ago,
Lewis and his team pointed to stronger pricing discipline by most of the
public companies (though with some outliers). Now, Lewis and his team
find price discipline has strengthened noticeably further.
Our view is that the industry downcycle is bottoming
We note that the improvement in commercial industry pricing discipline
has emerged from multiple industry sources over the past 18 months. Our
view is that it reflects a recovery from the severity of under-pricing during
the recent industry down-cycle that we think is now bottoming.
With the group, our favorite names are UNH and CI, both CL-Buy rated.
That said, ours is a sector call as we see a ‘rising tide lifting all boats’ as:
(1) the cycle turn shows in reserve building this year, with margin
expansion next year, (2) health reform uncertainty recedes, and (3) the
headwind to earnings from negative operating leverage eases as we
anniversary the severe member drop of 2009.
Matthew Borsch, CFA The Goldman Sachs Group, Inc. does and seeks to do business with
(212) 902-6784 | email@example.com Goldman Sachs & Co. companies covered in its research reports. As a result, investors should
Mikael Landau be aware that the firm may have a conflict of interest that could affect
(212) 357-4835 | firstname.lastname@example.org Goldman Sachs & Co. the objectivity of this report. Investors should consider this report as
only a single factor in making their investment decision. For Reg AC
certification, see the end of the text. Other important disclosures follow
the Reg AC certification, or go to www.gs.com/research/hedge.html.
Analysts employed by non-US affiliates are not registered/qualified as
research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research
Goldman Sachs Global Investment Research 1
March 3, 2010 Americas: Managed Care
Transcript of conference call with Willis
Matt Borsch, Goldman Sachs:
Good morning, everyone. Thanks for joining us today for the Goldman Sachs Managed
Care Industry Expert Conference Call with Steve Lewis of employer benefit consulting firm
Willis. This will represent our 7th annual conference call with Steve Lewis.
Steve and his team have agreed to give us frontline perspective on 2010 managed care
pricing and product trends. As background, Willis is the third largest insurance broker in
the world with approximately 350 million in employee benefits revenues in North America
with a focus on the middle market employer segment.
That focus is particularly valuable given the lack of visibility on the segment from the other
health benefit consulting firms. And let me just elaborate on that. The context is that
national employer benefit consultants such as Hewitt, Mercer, Towers Perrin, and others
really focus their attention on the jumbo employer segment, which is overwhelmingly a
fee-based non-risk model.
However, the biggest earnings driver for the managed care companies are the fully insured
risk lives, and those are mostly through the small and mid-size employers that buy
through health insurance brokers. And we found that the brokers typically lack the scale
and sophistication to have a good perspective on macro industry trends.
However, as healthcare coverage has become more and more of a significant outlay for
employers, they've needed greater expertise but are often under served by the national
benefit consultants that focused on jumbo employers, so that's where Willis has built its
focus, serving as a high service benefit consultant for the middle-sized employers.
With that as an intro, let me reintroduce our guest speaker Steve Lewis, executive vice
president at Willis and regional practice leader. As background, Steve has 20 years of
experience in the employer benefits industry and previously served as a national account
executive with Oxford Health Plans, and also worked previously as a consultant with
With that, I'll turn it over to Steve to kick it off. Following that, I will serve as moderator for
a series of topical questions, and then, we will open it up to investor Q&A.
Steve Lewis, Willis HRH:
Good morning, Matt. Thank you again, for hosting us on this call. As always, I enjoy the
opportunity to do this with you each year. I also want to publicly acknowledge and thank
our team here for their support. The insight that I'll provide today and have previously
provided is largely the amalgamation of information that's developed from our team
working day in and day out with clients throughout the country.
I would add that my comments on this call will be directly based on my team's
experiences and do not necessarily reflect the experience of my Willis colleagues from
around the country.
BORSCH: Thank you for that, Steve. Let me jump right in here with, perhaps, the most
important question from the standpoint of institutional investors looking at the sector, and
that is, what are you seeing in terms of competition between the carriers, specifically
relative to last year or two years ago or whatever you want to use as the baseline, has
price competition increased or decreased?
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March 3, 2010 Americas: Managed Care
Price competition is LEWIS: As a specific answer to that, we would say, price competition is down from year
down from year ago ago. An overall theme that we would characterize this year, meaning, when I say this year,
even on the renewal the just completed January 1 renewals, and continuing up and through today. We feel this
business. is the most challenging environment for us and our clients in my 20 years in the business.
Not only is price competition down from year ago (when we had characterized last year's
price competition as being down from the prior year), but trend or (healthcare) inflation is
also up and appears to be rising. The incumbent carriers seem more willing than ever to
walk away from existing business resulting in some carrier changes.
And that's a significant adjustment from last year where we saw aggressive pricing on the
renewal front but not so much on the new business front. And then I'd say the other real
theme is we've seen some service levels that have gapped among few of the major players
which has further increased switching of carriers.
BORSCH: Let me move on to the next question here. If you look at the landscape, what
role do you see Third Party Administrators or TPAs playing in the competitive landscape?
And I guess this gets down to a related question if you could address between the
employer decision to self-fund or go with the fully insured purchase, are employers
shifting one way or the other.
LEWIS: Yes, I think taking the Third Party Administrator piece first, as in prior years, we've
seen little to no new penetration in our client base from the TPAs. There's still an
occasional place for them in the marketplace, but fewer and farther between in our opinion.
The networks have expanded to the extent across the country that there is now very
significant overlap, and the TPA discounts no longer really compete with what the major
managed care carriers have been able to do from a network standpoint.
With respect to the second part of your question (related to the self-funding versus fully
insured question), our clients primarily seem to want certainty in this economic
environment with respect to their healthcare spend.
So, unless they have either a reasonable track record of consistent and relatively
predictable claim patterns, clients that we expect to be fully insured are still largely biased
in that direction, and those that are on the fence as to whether they should be fully insured
or self-funded seem to, again, be biased more towards the fully insured product.
I would add that where we have had increased conversations is with our smaller client
segment that are increasingly frustrated with what we call blind renewals, meaning, no
claims data, and experiencing large increases on top of no claims data.
There's increased As a result, there's absolutely increased interest at the smaller client segment in evaluating
interest at the smaller potential self-funding with stop loss protection.
client segment in
evaluating self- BORSCH: Getting back into the topic of the competitive dynamics, can you touch on how
funding with stop loss criteria other than price play a role in carrier competition, whether that's in fully insured or
protection. self-insured or to the extent you draw a distinction, and to the extent that maybe that's
changed or not changed a little bit versus a year or two ago?
LEWIS: Yes, I think, as we've talked about in prior calls, price remains king in the middle
market, and is probably queen as well. Factors that can be a tie breaker other than price
would include network disruption to the specific population; market perception of the
competitive carrier's reputation; product flexibility, meaning willingness to allow
prescription drug carve-outs; ability to provide detailed reporting in a certain employee
population level, and funding arrangements offered. Not just the self-funded versus fully
insured argument but some of the hybrids or the more creative solutions within the fully
insured marketplace such as minimum premium or participating contracts in the fully
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March 3, 2010 Americas: Managed Care
Those things taken together can all factor in as tie breakers with respect to how employers
are evaluating carriers. But even still, price certainly remained the most significant driver.
I would add one thing; you asked how it's changed from prior years. I think last year on
this call, we talked specifically about the playing field that was fairly level on the service
end of the equation and as I mentioned at my opening comment, we have seen a bit of
gapping with respect to the services at some carriers. And that is driving employers to
certainly take a look at what's available on the marketplace. Then again, finding that
there's not a lot of aggressive price competition, the service disruption would have to be
fairly significant for somebody to move knowing that they're not going to be able to trade
down pricing very significantly.
BORSCH: Is it the case that the service disruptions that you've seen in some instances are
severe enough to reach the threshold where they switch?
In some cases, service LEWIS: The short answer is yes. We have seen some of that, and I think we've seen it at a
disruptions are leading lower price threshold than what we would've seen in the past.
to carrier switching at a
lower price threshold BORSCH: Let me move to a slightly different topic here, and obviously, the background
than in the past. here is the severe recession that was certainly having an impact when we talked a year
ago. But, now we've been through a lot more pain even though the economy is showing
signs of recovery. A lot of the impacts of these types of things are lagged.
So, I guess, it's sort of a general question how significant a role has the recession played
in the clients' product managed care strategies. And, what have you seen in terms of the
overall group enrollment changes related to that? It's sort of a high level question there,
but trying to understand what the impact of the severe recession has been on the way
employers look at things, buy things, and on enrollment?
LEWIS: Yes, I'd say, it's a great question and an interesting one particularly as we look at
this market. You mentioned the lag factor and the timing of the stock market drop of mid-
September 2008 was fairly late in the game to impact many employers' January 2009
strategies. So, most were not making any significant benefit changes, and/or made the
specific decision to hold the line when it came to health benefits at the end of the day due
to the freezes or cutbacks in other areas such as pay, 401K matches, and staffing levels.
So this year, I think, we saw a lot of employers saying, they were not going to make that
mistake again or very early on in 2009 looking back and saying, if I had to do it over again,
I probably would've made more drastic changes and not held the line with health benefits.
So, it is a bit ironic that they didn't – a lot of employers chose not to make the change last
year when we were in the deepest part of the recession. But this past year the renewal
process started much, much earlier for employers even knowing that the sooner they
started, the more impact trend uncertainty would have on their renewal.
Strategic planning just started much earlier, and employers wanted to see just about every
option under the sun both in terms of pricing, plan design, extreme options, really hedging
themselves trying to get some clarity as to what their options were with respect to health
benefits, because they didn't have clarity on either the direction of the market, the
economy, or even their own specific prospects.
It was without a So, as I mentioned at the outset, it was without a doubt the most challenging renewal cycle
doubt the most in my 20 years of this business with employers really struggling with how and what was
going to drive their decision combined with the lack of aggressive and competitive pricing
cycle in my 20 years
in the marketplace.
of this business
I think, to your last point about how that may have impacted group enrollment, I'm not
sure I have anything significant statistically to share with you today. However, anecdotally,
I would say that enrollment is down across our book of business. We looked at 2009 going
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March 3, 2010 Americas: Managed Care
into the year and planned for the enrollment on our client base to be down 10 percent, and
I would say that was fairly accurate.
BORSCH: You alluded to something I just wanted to clarify – it may be that this isn't
measurable, but on the question of adverse selection (and, here, we're talking about the
employer market, not the individual market), you alluded to the potential that some
employees might be more likely not to take up coverage or, in fact, to discontinue
employer subsidized coverage, because even though it is subsidized it can be a very
sizable chunk out of their pay for a benefit package that may look less attractive after some
of the changes the employers have made.
So, to the extent you can infer if you're seeing any of that (and, related to that, the COBRA
uptake), has that been something that you measure? Has it come up in how the carriers
have presented their pricing? Finally, do you have any sort of visibility on whether that
trend is increasing or abating?
LEWIS: Let me take the first part on something I've alluded to about the potential for
adverse selection due to younger, healthier folks dropping and/or not selecting coverage
to begin with. You know, I think it depends a bit on the demographics of the population,
the type of industry; our clients really span just about every industry out there.
Adverse selection So is adverse selection on the rise in the group market? I would say it is, but I don't have
appears to be on the any data to back that up, but just based on the fact that the population is down 10 percent
rise in the group
across our book. And we look how the census in those client populations has shifted. I
would suggest that there is: I don't want to overstate it because I'm not sure it's significant
at this point, but I certainly would see some creep, if you will on adverse selection.
I think that ties to your second point about COBRA uptake. We did not keep specific
statistics on the extent of COBRA uptake. But we certainly saw it across the board, in our
client base, and we certainly believe that it is impacting the pricing that our clients are
BORSCH: Given what you're facing from a more conservative underwriting environment
amongst the carriers, how are you leveraging or seeking to leverage current market
conditions to your clients' advantage in renewal negotiations?
LEWIS: Well, as stated the outset, and probably ad nauseum at this point and it's been a
Carriers were very selective in going after new business, and incumbents were willing to
walk away from existing clients. So we had to be incredibly creative in our negotiation
tactics as well as in our strategic advice with clients. And again, it was something that
fortunately for us, in the process, we did start early and while it consumed a lot of energy
from all of the stakeholders it was probably the year of creativity.
With respect to negotiation tactics, one of the interesting things is that we seemed to have
seen a bit of a bifurcation in the marketplace at the plus or minus 300-employee size.
In the groups under 300 employees, many of them don't have or are unable to get control
of their claims data either as a result of the products they’ve purchased or just
underwriting guidelines at the carrier level where they don't have complete control of their
claims data. In that under 300-market place, there was very little competition and very high
renewals right out of the gates.
However, in the over 300-employee market, if the claims data was available and in a
detailed way and you could make a story about that claim's pattern and possibly make
adjustments for a spike – a one-time spike. Then, you would see competition pick up. But
again, it was very selective and certainly not anything we would characterize as overly
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March 3, 2010 Americas: Managed Care
BORSCH: This lead in to the next question: Can you generalize about what is the average
rate increase that you're observing: both the initial carrier request and the final end point,
post negotiation and plan changes? And can you tell us about the extent of plan benefit
reductions in achieving final results for your clients?
LEWIS: Averages are tough, you're right, and probably don't tell a very good story and
some clients look at that and say, wow, how did you get that average? I must've been the
high person. But the range was all over the place and fairly extreme. I'd say we settled in a
range, on our book of business, from a 5% reduction to a 50% increase.
But generally speaking, we were in low to mid-teens out of the gates, and this is where the
real challenges begin. Because negotiations generated no more than one to one and a half
points with no plan changes. And so it's almost like you were getting a first and final and
you had to dig through the renewals to find a mistake.
That's less movement than we've had in each of the prior years and certainly, not turned in
the right direction from our clients' perspective.
BORSCH: But on the benefit plan changes that your clients have implemented, would you
say those are more substantial today than what you saw a year ago?
Benefit plan changes LEWIS: I would say that incrementally the changes are more substantial, but visually to
are more substantial employees, they're fairly significant. You know, just about everybody did something this
than a year ago. year. And it did vary as you would imagine by the extent of the renewal and the existing
plan structure, but things like 100% co-insurance are virtually gone.
LEWIS: What we saw was a lot of tweaking, where we'd see the employers bifurcating the
primary and specialist co-payments, adding prescription drug deductibles on top of co-
payments, and really focusing on plan changes first and foremost before looking at
impacting employee contributions.
INVESTOR QUESTION: You talked about client renewal process starting earlier as the
planning process started earlier. Does that mean the contracts are actually being signed
earlier and therefore the carriers will have more visibility into the premium yield this year
compared to previous years?
LEWIS: Great question. The answer is no. The contracts are not renewing any earlier, just
the negotiation process. So, in our world, generally speaking, we would look to get a
renewal (depending on the size of the group) from 90 to 120 days before the expiration of a
This year, clients were looking to us (and to a certain extent from the carriers) to extend
that to 6 months out: where we start predicting where the renewal is going to end up. And
to the extent that the carriers were willing to provide a preliminary renewal, they have to
load in a lot of trend because they have to make guesses on the claims going forward.
And then as you move closer to the expiration date, they offset trend with the wrong
claims experience. So nobody was renewing or signing contracts earlier, they were just
dragging the process out much, much longer from both the carrier side and the employer
BORSCH: Let me ask a question, and hopefully, this is isn't repetitive, but in the market
studies that you've reviewed, how wide have the gaps been between the different carriers?
Have you noted one carrier or groups of carriers relative to the others that have been
especially aggressive or perhaps overly conservative that stand out?
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March 3, 2010 Americas: Managed Care
Generally not seeing LEWIS: The short answer is no. I think in particular situations, we've seen a couple of
one carrier being more carriers be more aggressive than others. But I'm putting quotes around more aggressive
aggressive than the because we're generally in the three to five percent range between pricing from where an
others. incumbent renewal might be and what might be considered aggressive.
Now, there were few exceptions on some of our larger middle market clients, as I've
mentioned earlier, with very clean data, stable business, perhaps a one-year blip with the
incumbent that cause the incumbent to get skittish and want to shut the business and a
competitor to come in and price it more aggressively. But as a general rule, Matt, we were
in a pretty tight range during the market study process.
BORSCH: We've talked in prior years about tracking the gradually growing interest in the
consumer-directed health plan products. Where you would say we stand now? Have you
seen the uptake increase meaningfully as a result of all the pressure of the last year? And,
you know, if you can offer a little bit of a forecast, do you think that may change going into
Surprisingly, not a LEWIS: Yes. Surprisingly, we have not seen a significant shift towards the consumer
significant shift directive plan. Across the board, it's now an option for most employer groups. And the
towards the consumer clients that have offered it for the longest period of time (call it three-plus years) are now
directed plans. exceeding double-digits, but that's the low double-digits for enrollment as an option.
New offerings continue to generate very low enrollments out of the gates with still almost
no full replacements at this point. I think the one shift we have seen is a swing towards
health reimbursement accounts and away from health savings accounts that more
employer-friendly. And employers are doing more to tie their wellness rewards and
strategies to their health reimbursements accounts.
So I'd say if you ask about a crystal ball, really the tying of wellness and to focus on
improving the health of a population, then consumer health plans tied to an HRA account
is where we see this market moving and really the potential for the biggest surge.
BORSCH: Let me just conclude with one last one I want to throw at you here, Steve. This
has been tremendous insight that you've brought for us so I want to thank you. On health
reform, obviously, this is a huge thing in the background but it's a practical matter, but it
doesn't necessarily have that much day-to-day impact on things.
But to what extent is health reform something that the employers are looking at? Are they
talking to you about it? Have you got ‘two cents’ on where opinions fall amongst
employers about what they would like to see happen relative to what's been presented in
LEWIS: Yes, we are talking to our clients a lot about it. There is a lot of what I would call
academic interest at this stage of the game. They're very mixed in their reaction, quite
candidly consistent with what we're seeing in the polling numbers by party lines.
I think most people would acknowledge that there's a need for healthcare reform,
employers continue to be very frustrated. So when they look at what the Obama
administration and the Democratic Majority state as their goals to increase access and
lower cost and rail at what maybe termed oligopolistic behavior of carriers in certain
markets, I think employers really buy in to that message and have much of that frustration
and anger at our lack of solutions.
But I would also say that many of them still view the legislation and the partisanship
coming out of Washington as possibly the medicine worse than the disease. So, many
employer groups that we're talking to feel like it would be a shame to lose an opportunity
to do something with respect to healthcare reform. But many are starting to feel like
maybe nothing is better than something in this current environment.
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March 3, 2010 Americas: Managed Care
BORSCH: This is probably a good place to end our call. Steve, thank you very much. This
is really a great frontline perspective on industry trends and I want to thank you and your
firm Willis, and also thank our investor clients who dialed in.
LEWIS: Thank you, Matt. I appreciate it.
Rating and pricing information
CIGNA Corp. (B/A, $34.44) and UnitedHealth Group (B/A, $33.95).
Goldman Sachs Global Investment Research 8
March 3, 2010 Americas: Managed Care
We, Matthew Borsch, CFA and Mikael Landau, hereby certify that all of the views expressed in this report accurately reflect our personal views about
the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly,
related to the specific recommendations or views expressed in this report.
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and
market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites
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Coverage group(s) of stocks by primary analyst(s)
Matthew Borsch, CFA: America-HCManaged, America-Healthcare Services:Facilities.
America-HCManaged: Aetna, Inc., AMERIGROUP Corp., Centene Corp., CIGNA Corp., Coventry Health Care, Inc., Health Net, Inc., HealthSpring Inc.,
Humana Inc., Magellan Health Services, Inc., Molina Healthcare, Inc., UnitedHealth Group, Universal American Corp., WellCare Health Plans, Inc.,
America-Healthcare Services:Facilities: AmSurg Corp., Community Health Systems, Inc., Emergency Medical Services Corp., Health Management
Associates, Laboratory Corporation of America Holdings, LifePoint Hospitals, Inc., NightHawk Radiology Holdings, Inc., Quest Diagnostics
Incorporated, Select Medical Holdings Corp., Team Health Holdings, Inc., Tenet Healthcare Corp., Universal Health Services, Inc., Virtual Radiologic
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Goldman Sachs Global Investment Research 10
March 3, 2010 Americas: Managed Care
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Goldman Sachs Global Investment Research 11